Spain will set out today its austerity budget for 2013, against a backdrop of a deteriorating economy and 25% unemployment rate.
Madrid is expected to outline 39 billion euros ($50 billion) worth of savings, tax rises, and structural reforms.
It comes amid further protests this week, and growing expectations that Spain will seek a bailout from its eurozone partners.
On Friday, results of a stress test on Spain’s banks are due to be released.
The Spanish stock exchange’s Ibex index held steady in morning trading on Thursday, having lost 3.9% the previous day.
Other European stock markets experienced modest rebounds of about 0.5%.
Stocks fell sharply on Wednesday, as markets were rattled by violent protests in Madrid and Athens, as well as a statement from the Spanish central bank that the country’s economy had continued to shrink in the third quarter of the year.
However, the more optimistic sentiment was boosted on Thursday when the Greek finance minister, Yannis Stournaras, said that a “basic agreement” had been reached with lenders on the austerity measures required for the release of Greece’s next tranche of bailout money.
On the bond markets, the Spanish government’s long-term cost of borrowing stabilized in early trading, at an implied interest rate of just over 6% for 10-year debt.
The 10-year rate had risen by a quarter percentage point on Wednesday, as lenders’ fears over the government’s ability to repay its debts, or stay within the euro, resurfaced.
However, it seems investors are losing patience.
Spain will hope that Thursday’s austerity measures will mean fewer economic conditions if it asks for a second bailout.
Prime Minister Mariano Rajoy fuelled expectations that Spain would ask for a bailout when he told the Wall Street Journal on Wednesday that if borrowing costs were “too high for too long”, then “I can assure you 100% that I would ask for this bailout”.
The economic situation remains grim, with comments from the central bank on Wednesday indicating that the country’s recession deepened in the last three months.
“Available data for the third quarter of the year suggest output continued to fall at a significant pace, in an environment in which financial tension remained at very high levels,” the Bank of Spain said in a monthly report.
Last week, Spain’s second biggest bank, BBVA, estimated that up to another 60 billion euros ($78 billion) will be needed to bail out the banking sector.
About 20 billion euros has already been allocated to troubled banks.
Spain, the eurozone’s fourth largest economy, fell back into recession in the last quarter of 2011, the second recession since the bursting of the country’s property bubble.
But with a shrinking economy and unrest in the country, reducing the deficit via further austerity measures may prove a difficult task for the government.
The government has predicted a budget deficit this year of about 6.3%, but many analysts estimate it will be nearer 7% or higher.
The basic outline for the budget has been known since July, but not exactly where the cuts and savings will come from.
There has been speculation that the budget could include such measures as taxes on shares transactions, “green taxes” on emissions or eliminating tax breaks, and even possibly ending inflation-linked pensions.
Madrid has already said that it wants to claw back a total of more than 150 billion euros between 2012 and 2014: 62 billion euros this year, 39 billion euros in 2013, and 50 billion euros in 2014.
But many analysts remain skeptical that this will be enough to resolve Spain’s economic woes.
Despite the public anger, PM Mariano Rajoy said sacrifices were necessary.
“We know what we have to do, and since we know it, we’re doing it,” he said in a speech in New York.
“We also know this entails a lot of sacrifices distributed… evenly throughout the Spanish society,” he said.
But Boris Schlossberg, managing director at New York-based BK Asset, said: “Spain is in a vicious cycle, because austerity is hurting economic activity and revenues, which causes greater fiscal gaps.”
“People are starting to realize this, and the political will to absorb these sacrifices is diminishing by the hour,” he said.
